I am writing today to help inform people who are new to the stock market and want a simplistic look at the return on ENEA SA (WSE:ENA) stock.
Buying ENEA makes you a partial owner of the company. As a result, your investment is being put to work to fund operations and if you want to earn an attractive return on your investment, the business needs to be making an adequate amount of money from the funds you provide. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. Therefore, looking at how efficiently ENEA is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.
ENEA’s Return On Capital Employed
You only have a finite amount of capital to invest, so there are only so many companies that you can add to your portfolio. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business’ ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. A good metric to use is return on capital employed (ROCE), which helps us gauge how much income can be created from the funds needed to operate the business. This metric will tell us if ENEA is good at growing investor capital. Take a look at the formula box beneath:
ROCE Calculation for ENA
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = zł1.2b ÷ (zł30b – zł4.5b) = 5.2%
The calculation above shows that ENA’s earnings were 5.2% of capital employed. This shows ENEA provides a dull capital return that is below the 15% ROCE that is typically considered to be a strong benchmark. Nevertheless, if ENA is clever with their reinvestments or dividend payments, investors can still grow their capital but may fall behind other more attractive opportunities in the market.
Why is this the case?
The underperforming ROCE is not ideal for ENEA investors if the company is unable to turn things around. But if the underlying variables (earnings and capital employed) improve, ENA’s ROCE may increase, in which case your portfolio could benefit from holding the company. Because of this, it is important to look beyond the final value of ENA’s ROCE and understand what is happening to the individual components. Three years ago, ENA’s ROCE was 9.1%, which means the company’s capital returns have worsened. Over the same period, EBT went from zł1.2b to zł1.2b but capital employed rose by a proportionally greater amount because of an increase in total assets , which suggests investor’s ROCE has fallen because the company requires more capital to create earnings despite the previous growth in EBT.
ENA’s investors have experienced a downward trend in ROCE and it is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. However, it is important to know that ROCE does not dictate returns alone, so you need to consider other fundamentals in the business such as future prospects and valuation. If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate ENA or move on to other alternatives.
- Future Outlook: What are well-informed industry analysts predicting for ENA’s future growth? Take a look at our free research report of analyst consensus for ENA’s outlook.
- Valuation: What is ENA worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether ENA is currently undervalued by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.